How much life insurance should you buy?

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It is very common nowadays to see advertisements and text messages offering Rs 1 crore term life cover. Even though Rs 1 crore seems like a huge amount, the amount of life insurance you need will depend on a lot of factors such as your income, your family, the number of dependents, your lifestyle, your loans and other such factors.

Is there a method to find out how much life insurance you will approximately need? There are several ways to find out. Even though they are theoretical, you can use them to get a fair idea about the amount of life insurance that might be right for you and your family. Read on to find out about these methods.

Income multiplier method

This is one of the easiest methods used to calculate life insurance requirement. This involves the least amount of mathematical calculations. This method says that you should have a life cover that is at least 10 to 12 times your total annual income. For example, if your annual income is Rs 15 lakhs today, your coverage should be Rs. 1.5 crore to Rs. 1.8 crore. If you’re a 30-year-old salaried female who is a non-smoker, earning Rs 15 lakhs per year, you can get a cover of Rs 1.5 crore for 20 years with monthly premiums starting from Rs. 800.

Underwriters’ thumb rule

This is similar to the income multiplier method. However, under this method, the multiplier factor will differ based on your age. The multiplier will be higher when you are young and will be lower as you get older. A higher cover is needed when you are young because you might have a number of dependents. After your children grow and start working, you might need cover only for your spouse. Also, you might have paid off your loans and your income will be higher, so savings might be more when goals like children’s education have been met. The table below gives the multiplier factors that are used to calculate life insurance cover.

Age

Multiplier factor

Less than 30 years

15

30-40 years

14

40-50 years

12

50-60 years

8

Over 60 years

6

However, note that these methods don’t take into account your family needs, your lifestyle and other such details.

Income replacement method

As the name suggests, this method will help calculate the income that will be needed by your family. The method takes into account many important factors such as your age, the number of years you are expected to work and your yearly income. However, the method doesn’t take into account inflation over the years and changes in your income.

Here’s how life cover is calculated using this method. Suppose your age is 30 years and you plan to retire when you are 60 years. So, you plan to work for a period of 30 years. Your yearly income is Rs 10 lakh. The cover that you need will be Rs 10 lakh multiplied by 30 which will be Rs 3 crore.

Human life value method

Most insurers use the Human Life Value (HLV) method to calculate insurance needs of prospective policyholders. Unlike the income replacement method, this method says that the life cover should be good enough to create income that is equal to the income earned by the policyholder. Let’s take an example. Suppose your yearly income is Rs 5 lakh. The aim is to have a sum of money that will be enough to earn this money when invested in low risk or no risk investments. Let’s take a return of 9%. Suppose your investment will earn 9%, you will need a sum of Rs. 55.55 lakhs (5 lakh/0.09). You can add your loans to this amount to get the right sum assured.

Need analysis

This technique takes into account all the day to day expenses you incur to calculate the life cover. It also considers the number of dependents you have, the future expenses that you might incur such as children’s education, your loans and other such details. The assets that you have, are deducted from the life cover sum arrived at. This is a very tedious method and you might need the help of a financial planner.

Which method to follow?

You can try any of these methods and consider a combination of both. If you want to keep it simple, there are many online calculators available for calculating the amount of life cover that you might need. These are available on insurer websites and personal finance portals.

RupeeIQ has a retirement calculator that will help you find out how much you will need after retirement.Click here to calculate your retirement corpus.